Coordinating Traditional and Internet Sales

New Jersey Law Journal Volume 188, No. 9, Index 657 May 28, 2007



Jonathan Bick -- Bick is of counsel to WolfBlock Brach Eichler of Roseland and is an adjunct professor of Internet law at Pace Law School and Rutgers Law School. He is also the author of 101 Things You Need To Know About Internet Law [Random House 2000].

Manufacturers and distributors use traditional stores and Internet sites to sell goods and services. Too often, when identical items are offered simultaneously through these channels, Internet price advertisements divert so much business from the traditional stores, that the traditional stores cease offering the items. MAP (minimum advertised price) agreements, which prevent items from being advertised below some specified amount (the minimum advertised price) are often employed to maintain access to both traditional and Internet sales channels. Typically, lower operating costs allow Internet sites to consistently offer lower prices than traditional stores. In addition, Internet business frequently profits from shipping and handling charges. Thus, Internet sites habitually earn a higher profit than a traditional store selling identical items at the same price.

The successful implementation of a MAP agreement among merchants selling a particular item will results in all channels advertising the same item at identical prices. Consumer acquisition preferences vary. When the price is equal, some value the convenience of Internet shopping over the reliability and personal service of traditional stores. Others hold a contrary view.

MAP agreements only deal with the advertised price of an item. Manufacturers and distributors may have a policy about the channel member's retail price as well. However, resale price policies frequently subject the manufacturers and distributors who use them to antitrust scrutiny.

Manufacturers and distributors normally offer merchants enticements to participate in MAP agreements. For example, one MAP agreement provides that advertising expenses will be reimbursed for all ads that do not contain a price lower than an amount specified by the manufacturer or distributor. Thus, a manufacturers and distributors may be willing to pay for advertisements that appear on Internet sites.

Courts have adopted two analytical modes to determine whether a business activity violates antitrust law -- the rule of per se illegality and the Rule of Reason. The case of Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958), found that there are certain agreements which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry as to the precise harm they have caused or the business excuse for their use. The court found these agreements to be unlawful under the rule of per se illegality. Initially, courts found that MAP agreements were a form of minimum resale price control, per se unlawful under antitrust law.

The Rule of Reason test was first introduced in antitrust litigation resulting in the famous break up of John D. Rockefeller's petroleum monopoly. In Standard Oil Co. v. United States, 221 U.S. 1 (1911), the Court held that to ascertain whether a particular business activity was illegal, the activity must be found to reduce competition given the totality of the circumstances. In 1987, the Federal Trade Commission (FTC) held that MAP agreements were not automatically unlawful where they do not attempt to control the channel member's right to actually sell products below MAP. This FTC rule forced the courts to abandon the rule of per se illegality and adopt the Rule of Reason for the analysis of MAP agreements. To prove a violation of the Rule of Reason, the plaintiff must establish that, on balance, the activity pursued by the company suppresses competition more than the activity promotes it.

While the Internet is the new frontier for MAP programs, cases and FTC rulings are applicable. Consequently, the relatively safe harbor of co-op programs almost certainly applies to Internet retailing. As a result, properly constructed MAP agreements allow manufacturers and distributors to pay for an Internet site as part of co-op advertising program. Similarly, such a MAP agreement could be limited to apply to some pages of a Web site but not others. For example, a MAP agreement could prohibit below-MAP prices on the first several Web pages a shopper would see when it accesses the Web site, as long as it permits a different price to be advertised elsewhere on the site.

MAPs, also known as 'suggested retail pricing,' are generally held to be legal and not a per se unlawful attempt to fix retail prices, providing no other attempt is made to influence the retail selling price of the product. Courts use the 'rule of reason' approach to determine whether such a program is lawful. See Federal Trade Commission, Statement of Policy Regarding Price Restrictions in Cooperative Advertising Programs-Rescission, 6 Trade Reg. Rep. (May 21, 1987).

A clause that states, 'you agree that when using our advertisement funds you must advertise at our suggested list price or at no price at all' is lawful. But a clause which states, 'we will give you a $100 rebate per item if you maintain the minimum advertised price, and no rebate per item if you sell below the MAP' is likely to be deemed an illegal price-fixing arrangement.

To avoid even the appearance of price-fixing, manufactures and distributors usually send a letter explaining their MAP agreement to their merchants, along with the MAP agreement. Such a letter would include that following points.

The letter to the merchants must clearly state 1) that the MAP agreement is associated with a product's advertised price and does not limit what the merchant may charge for the product; 2) the MAP is a voluntarily agreement; 3) what the merchant will receive, such as free samples, literature, and education, the use of the manufacturer's trademarks, and eligibility for volume discounts; and 4) what Internet strategies are acceptable, such as listing the price of the product as too low to show, or use a caption indicating they are displayed at MAP price.

The letter might also include content for posting on the Internet merchant's site, such as:
A Minimum Advertised Pricing (MAP) agreement is a voluntarily agreement that all legitimate manufacturer authorized retailers enter into with their authorized USA suppliers. This agreement allows us to supply you with the best service and lowest price from the manufacturer. Dealers that do not abide by requested pricing policies may lose access to such products and post sale service.

We respect our MAP contracts; however, MAP agreements permit us to supply product for a selling price below MAP. We make those prices available to you by stating that the price of the items on display are 'Too low to show' and showing you the true price at check out. Alternatively, if you send us an e-mail request we will e-mail you the discounted price. In this instance, above the displayed MAP price you will be invited to supply your e-mail address so we will be able to e-mail you our best selling price.

MAP agreement may be incorporated into existing agreements or may be stand-alone agreements. The agreement should cover all the content set forth in the cover letter sent to the merchants. In any case, an effective MAP agreement must address the following five points: 1) the manufacturer or distributor establishes the MAP agreement unilaterally; 2) the manufacturer or distributor will not discuss this unilateral minimum advertised price policy with its retailers except for providing the terms of the policy and examples of compliant and noncompliant advertising; 3) the MAP covers all types of advertising with the exception of the retailer's in-store merchandising and Internet shopping cart; 4) the retailer sets their actual resale price; and 5) a description of the enforcement plan.